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The Creation of Sustainable Business in
Russia's Nuclear Cities
Juan Matthews
Tacis Project on Innovation Centers and Science Cities
INTRODUCTION
Over the last two years, the Tacis project on Innovation Centers
and Science Cities has been working with four Russian scientific
cities:
Obninsk—Russia's first
Naukograd. Obninsk is a nuclear city centered around
the Institute for Physics and Power Engineering of the Ministry
for Atomic Energy (Minatom), but with 15 institutes covering
advanced materials, medical radiology, meteorology, radiation
chemistry, agricultural ecology, and technical education.
Reutov—adjacent to Moscow on the west and
home of the MashinoStroyenia Research and Production
Association, developer and manufacturer of civil and military
aerospace hardware. Now MashinoStroyenia is diversifying into
environmental equipment and information technology.
Koltsovo—close to Akademgorodok and home
to the State Research Center for Virology and Biotechnology,
Vector. Vector was formerly part of Biopreparat, the state civil
and military bioproduction organization, but is now an
internationally recognized center for virology and a developing
cluster for pharmaceuticals.
Troitsk—another nuclear city close to
Moscow and home to TRINITI (Troitsk Institute for Innovative and
Thermonuclear Research), the Minatom center for civil and
military thermonuclear research. Troitsk also has
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nine other institutes, mainly affiliated with the Russian Academy of
Sciences, which are involved in a wide range of physical science work.
The Tacis project has been working with federal and regional
government to develop policies on science cities, but more importantly
to this conference, the major effort has been in working directly with
R&D institutes and with local innovation infrastructure to develop
methodologies to release the commercial potential of the science base
and promote new business. Experts from the European Union, from
Russian academies and consultancies, and from local organizations were
used to carry out the work. About 200 local staff in institutes and
innovation support centers were given training, new equipment was
provided to support the innovation infrastructure, direct support on
commercial development was given to six selected institutes, and nine
demonstration projects were carried out on commercial development. The
final result included three new joint venture companies, two nonprofit
partnerships between R&D organizations and industry, and
significant restructuring in three institutes to assist their
commercial development. The methodology and training materials were
published in Russian in a series of books produced by the project, and
the material on commercial development of R&D organizations is
available in HTML form and will be put on the Internet in Russian and
English for free access.
SUSTAINABLE DEVELOPMENT
Sustainability may have become a somewhat clichéd
expression, but it is the most important principle here. Either the
nuclear cities are to survive or they are to be obliterated in a
costly process of withdrawal—costly in both economic and
human terms. Sustainability means finding ways that allow
development to continue without long-term external support.
In real terms, sustainability means two things:
commercial development of the intellectual property
(IP) and capabilities in the cities
flow of cash back to the infrastructure of the cities
and to the institutes that generate the long-term
science and technology potential
Exploitation of IP in small businesses is not all that is required
to initiate and sustain innovation. A brief look at successful
clusters in the United States and Europe will show that this is the
case. These clusters are based on centers of science and technology
education and R&D— Stanford, MIT, Oxford, Cambridge,
among others—combined with good infrastructure and
communications. In the West the drivers for technological
development are our universities and, to a lesser extent, national
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laboratories. The research laboratories of large corporations and
innovation enterprises feed off the flow of ideas and staff from the
universities. Constrain or close down the universities, and the whole
of the scientific infrastructure will die.
The situation in Russia is different. A historical accident has
resulted in the separation of university education and scientific
research to a large extent. This happened before the Soviet period,
but the system of separate research institutes suited the requirements
of a centrally planned economy. All science cities are based on one or
more state research institutes. Some of the larger science cities also
have educational institutes that usually serve the requirements of the
research organizations. Scientific production and services are often
closely located to R&D institutes, and some R&D institutes
have a primary or secondary production role. The universities are
found elsewhere in Russia's large cities and have very limited
scope for research; hence, both the student body and the teaching
staff are isolated from the realities of industry and research.
To create sustainable business, mechanisms are needed to bring
together R&D with sources of young bright staff and the generation
of a body of people with the commercial skills needed to create
innovation businesses. In the rest of the presentation we will look at
aspects of such mechanisms.
CULTURAL CHANGE IN R&D
ORGANIZATIONS
This project was preceded by a project entitled Science and
Technology Development in the Russian Market Economy, which was
carried out between 1995 and 1998. That project focused on the
development of innovation management policies and the creation of
innovation centers in four cities—Tomsk, Novosibirsk, Samara,
and Zelenograd. Although the innovation centers were successfully
set up, little progress was made in attracting new business from
local R&D institutions. The reason for this was the poor
development of commercial understanding in these institutions.
Consequently the current project has devoted a lot of its time to
cultural change in institutions. One of the two consortium members
running the project is AEA Technology plc, a large publicly quoted
technology services company created from a government R&D
organization with several research centers in the United Kingdom,
the UK Atomic Energy Authority. The successful creation and
development of AEA Technology depended heavily on a top-down
cultural change process that required the commitment of every staff
member. The experience from this was invaluable in convincing
directors of Russian R&D institutions of the benefits of
commercialization.
The first step in working with the Russian institutes was to do an
appraisal. The appraisal process was not just a technology audit
but also
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an in-depth understanding of the systems and culture. The method used
for the appraisal was a workshop with the director and main officials
of the organization at which information was collected to establish an
institutional development profile covering 10 critical areas:
1. Purposes and aims (strategy) —does the institute
know where it is going?
2. Leadership—is the institute led or is it
administered as part of a bureaucracy?
3. External factors—is the institute to some extent
controlling its destiny?
4. Culture—is the institute culture suitable for the
future?
5. Capabilities—what is the status of the skills of the
staff and the facilities?
6. Individual needs (motivation) —are the staff content
and working well?
7. Systems—are there adequate systems in place to
enable the institute to function properly?
8. Management—what is the quality of the management?
9. Structure (organizational) —is there a clear
structure that is suitable for the future?
10. Commercial understanding—are there staff trained in
commercial processes?
In all, 15 institutes were appraised and their directors given
appraisal reports that also gave some outline indication for
development priorities. The six institutes selected for participation
in the full project were chosen on the basis of a range of development
levels to provide a good range of models for the output of the
project.
The appraisal reports were used with the selected institutes as a
basis to form strategic plans and to identify the main areas for
cultural change. In almost all cases the institutes were strong in
capabilities, leadership, and purposes, but were all poor on
commercial understanding and had a culture that was not suitable for
the future in a market economy.
Producing cultural change relies on commitment from the director of
the institute, and one selection criterion was the willingness of the
director to participate. In looking at institutes in the cities, a
number were found where it was clear the director did not want to
change the culture even if funding levels were making the management
of the institute impossible and even if there was pressure from
management and staff for change. No institutes in this situation
participated in the project. It quickly became clear that the degree
of development was not to extend to privatization, but the requirement
was to create an extra income flow to exploit the IP and capabilities
of the institute, and that is what the project concentrated on
achieving. Models of varying stages of development were
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Representative terms from entire chapter:
commercial development
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available from European experience with large publicly funded research
organizations. Figure 1 below shows the
stages of commercial development of government-funded R&D
institutions and compares them to the development of a selection of
European examples of R&D centers:
Strategic planning workshops and mentoring were used with institutes
to determine the degree of commercial development required and to set
actions for the program. Initially the institutes were mostly in the
mission-led or market-testing stages. The task was to take them to the
market-oriented stage, that is, to restructure them to introduce
commercially oriented departments while retaining a state-funded
R&D core. In the future the larger institutes will face the
decision for further development by detaching the commercial
activities or, in one case, to privatize the whole of the activities.
Cultural change was then encouraged through specific workshops to
build commercial skills and attitudes. In three cases, organizational
changes were carried out at this stage to reinforce the cultural
change. Topics included in the cultural change program were team
building, business planning, strategic marketing, negotiation skills,
pricing, project management, and the management of risk. In one case
where the institute was expecting a major change to be imposed on it
in about 18 months, it requested a series of more detailed cultural
change seminars covering the 10 topics from the original appraisal.
~ enlarge ~
FIGURE 1 Commercial development of state-funded R&D organizations.
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STRUCTURES TO PROMOTE BUSINESS
There are two requirements for market oriented R&D institutions— commercial capabilities and a structure that reflects the market. The first stage of development is the creation of a commercial department in the organization or, for larger organizations, in each division. The commercial department looks out for the needs of the customers and supplies information to the R&D, product development, and operations functions in the organization. The second stage is the restructuring of the divisional structure to match the simplest groups of customers. Restrictions on non-R&D activities in the institution often mean that management of intellectual property and operations relating to commercial contracts have to be carried out outside the institution in separate legal entities.
Figure 2 shows a typical commercial structure for a medium-sized R&D organization.
This model structure shows that federal budgetary links are entirely separated from the commercial activities, except that IP developed with federal funding is used in the commercial activities. One important decision is which of the required commercial capabilities are kept in the organization and which are purchased either from the local innovation infrastructure or private consultants. Exploitation of IP can be either direct licensing or sales to a customer, exploitation in a subsidiary or a joint
~ enlarge ~
FIGURE 2 Schematic view of a model commercial structure for an R&D institution.
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venture (JV), or by spinning off a separate company together with staff. The choice of which route depends on the desire to maintain the links and the commercial benefits of each option. Where production is involved, it is important not to be too ambitious if there is little experience in the institute and it is better to make a joint venture with an organization with the right track record. Sales or licensing of the technology is often not the route that gives the highest return, but it can have the lowest risk.
Table 1 outlines the various options.
In the project, production joint ventures were chosen as the correct route. In the other cases the technology was exploited in subsidiaries or separate spin-off companies. In no case was a decision made to exploit via licensing or sale of the technology, although one of the institutions had used that as the main route to market in the past. In two cases in the project, R&D institutions decided to set up formal legal partnerships with other institutions and private companies. In each case there was a different reason. In one case it was protection against competition and price erosion. Three institutes decided to create a national center to promote the market (which was underdeveloped), share resources, skills, and facilities, and hopefully pull in other players to strengthen the position in Russia for export markets. In the other case the partnership pulled together a lead institute with a major university to ensure that students gained actual experience and were properly trained in a new area. Private business also took part and gained resources from the institute and the university, who in return gained extra funding. Part of this partnership was the formation of a national training center in the subject.
TABLE 1 Options for Exploiting Intellectual Property
Option
Indication
Exploitation within institute, but consider separate sales company
Use of facilities that rely on continuing federal support
Subsidiary
When business is linked to main activities and new staff must be recruited
Separate company with service and/or equity link
When a nonstate company is needed for investment or financial management purposes
Joint venture
When a partner is needed for production or distribution
Sale of technology to an unconnected company
When there is no desire to be involved in production or sales
Spin-off with no connection
Small-sized business where the returns are not worth the costs involved in making charges
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OTHER FACTORS
There are two other issues that are important in controlling the
potential for development—the legal and tax environment and
issues relating to the location.
Unfortunately the legal and tax environment is not very clear.
Several of the main laws relating to science cities and R&D are
in conflict. Regulations on taxation on R&D institutions and
the transfer of payments for rent and services tend to discourage
commercial activities apart from contract research. Also, export
duties on certain goods and government constraints on strategic
materials and equipment are disincentives. All these areas need
attention, and where there is a priority for the development of a
nuclear city, specific incentives need to be put in place. A
special area is the legislation on intellectual property ownership.
The legacy from the time of the Soviet Union is a set of laws that
worked well then but are no longer consistent on the conflicting
rights of the author, the originating institute, and the funding
body. Preferably the originating body needs to be given clarity and
the option to make a clear legal contract with the authors and the
funding body on how they will benefit, if at all. The validity of
Russian patents overseas is very tenuous, and in some countries,
proving first discovery is difficult and, in some cases, unfair
towards countries like Russia. The cost of worldwide patenting is
usually prohibitive and a burden on institutions. A fund to help in
this area would be one solution.
Finally, there is the question of the city environment. In some
cities like Obninsk and Troitsk, the large R&D centers are
closed, but the cities themselves are open. Businesses outside the
fences of these nuclear centers can be easily accessed. In closed
nuclear cities, the lack of easy access is a problem that needs to
have a solution if commerce is to flourish. Unless new technology
businesses are linked into the wider business sphere, business will
not grow and particularly foreign investment will not be gained.
The solution is an administrative one and will involve a separation
of the military and civil activities and the creation of a business
park separate from the main city.
There is also the question of coherence and branding. In cities of
the Tacis project, some degree of coherence is starting to drive
the development of business. In Koltsovo there is a clear cluster
developing in the area of pharmaceuticals, biotechnology, food
products, and cosmetics that is driven by the skills of the staff
and former staff of Vector. Vector is now a brand that has some
degree of recognition.
Similarly in Obninsk, the original nuclear focus of the town has
widened, and the various R&D institutions are driving a
four-pointed set of commercial activities of radiation science,
environmental problems, process industries, and energy. These are
not so coherent as in Koltsovo but are
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sufficiently so to allow benefits to be obtained. The Institute for
Physics and Power Engineering (IPPE) is developing the FEI brand, and
Obninsk needs to continue to encourage more coherency rather than less
(see Figure 3). So far Reutov has
concentrated on diversification rather than focus, but the areas of
environmental products and information technology offer the basis for
some future coherency with the original aerospace work.
CONCLUSIONS
Research and production organizations need to change
their culture and internally reorganize to prepare for
more effective commercial activity.
The federally funded research base needs to be
preserved as a source of technology for business
development—in the absence of a university-based
R&D activity.
Research and production organizations need to be
flexible and imaginative in the types of commercial
activities they develop.
The town should look for some coherency of business to
stimulate cooperation between organizations and attract
industry.
The establishment of a city brand should be considered
based on the common science and technology activities.
Innovation activities should also be part of an overall
plan supported by an efficient infrastructure.
~ enlarge ~
FIGURE 3 Coherency of business in Obninsk driven by the subject areas of R&D institutions.
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Intellectual property ownership needs to be clarified and
simplified to the benefit of the originating institutions.
PROJECT PUBLICATION
Innovative Development of Territories in Russia and the European
Union: Experience, Problems, and Outlook (in Russian)
Vol. 1 The Science and Technology Potential of Russia and its
Application.
Vol. 2 The Practice of Economic Development of Territories:
Experience in the European Union and Russia.
Vol. 3 Commercial Development of Russian R&D Organizations.
Vol. 4 Regions of High Concentration of Scientific and
Technological Potential in Countries of the European Union.
Vol. 5 Science Cities of Russia: From Methodology to Practice.
Vol. 6 Problems and Future Development of Russian Territories with
High Concentrations of Scientific and Technological Potential.
Vol. 7 Science, Innovation, and Business: Anglo-Russian Glossary.
Moscow 2001, Pub. ScanRus.
Dual language HTML version of Vol. 3 available in CD-ROM form from
juan.matthews@pera.com .
